Panasonic Avionics bribery settlement spurs consolidation talk

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WASHINGTON — The conclusion of a year-long federal investigation into Panasonic Avionics could lay the groundwork for consolidation among satellite-enabled inflight connectivity providers struggling to turn a profit providing Wi-Fi to airline passengers, according to an equity research analyst.

Panasonic said April 30 it agreed to pay the U.S. government $280.6 million to resolve charges related to paying bribes to win some $700 million in inflight connectivity business from an unnamed state-owned airline in the Middle East. Panasonic Avionics will pay the U.S. Justice Department a $137.4 million fine for accounting violations under the Foreign Corrupt Practices Act. The unit’s Japan-based parent company, Panasonic Corporation, will pay $143.2 million to the U.S. Securities and Exchange Commission as a forfeiture of ill-gotten gains.

Panasonic Avionics is a heavy user of satellite capacity, going so far as to co-design spacecraft with satellite operators to optimise Wi-Fi and other inflight connectivity (IFC) services for airlines and their passengers. Its main competitors are Gogo, Global Eagle Entertainment, Viasat and Inmarsat.

Louie DiPalma, an analyst who follows aerospace and defense companies for Chicago-based William Blair, wrote April 30 that the IFC industry “has needed consolidation,” saying the three-year stock returns of Panasonic Avionics’ competitors “have all significantly underperformed broader indices because the commercial airline IFC industry is overcrowded, which has resulted in billions of dollars of cash burn.”

“If IFC industry consolidation were to take place, we believe that consolidation between PAC [Panasonic Avionics], Gogo, and Global Eagle would be the most likely because all three use the same Ku-band satellite technology, which would allow for significant bandwidth synergies. We would not be surprised if a third-party attempted to combine the commercial IFC businesses of all three Ku-band providers,” he wrote.

The U.S. government’s investigation into Lake Forest, California-based Panasonic Avionics, first disclosed in February 2017, likely made the company an unattractive player on the merger and acquisition scene.

According to the Justice Department, Panasonic Avionics in 2007 offered a lucrative position to a government official who was overseeing contracts at a state-owned Middle East airline. The official left the airline in early 2008. Over the next several years, Panasonic Avionics made some $875,000 in payments “for a position that required little to no work.” Panasonic Avionics concealed its payments to the former government official by transferring the money through an “an unrelated third-party vendor” that took a 20 percent cut.

The Justice Department said Panasonic Avionics earned $92 million in profits between 2007 and 2013 from airline contracts over which the government official had “had some involvement or influence.”

Panasonic Avionics falsified records for additional “consultants” who “did little or no actual consulting work” for the company, according to the Justice Department investigation.

Employees at Panasonic Avionics regional offices are said to have rehired at least 13 sales agents in Asia that had been let go for failing to meet the company’s vetting requirements. An internal review found that at least some of the 13 had been recommended by state-owned airlines; others lacked educational, business and technical qualifications.

The dismissed sales agents were subsequently rehired as “sub-agents” of a Malaysian sales agent and collectively paid more than $7 million, the Justice Department said.

In court documents, Panasonic Avionics admitted employees mischaracterized those payments, causing parent company Panasonic to falsify its records, violating the U.S. Foreign Corrupt Practices Act, or FCPA.

“This FCPA investigation may have hindered PAC from pursuing its acquisition strategy, and other financial and strategics from acquiring PAC, or parts of PAC,” DiPalma wrote.

In the wake of the investigation, Panasonic Avionics said it has replaced senior executives, formed an “enhanced compliance program,” and strengthened internal financial controls.

“This is an ongoing effort and the company will continue to strengthen its compliance programs and internal controls,” Panasonic Avionics CEO Hideo Nakano said in an April 30 statement. “With these investigations behind us, we are confident that Panasonic Avionics is well-positioned for long-term success under our new management team.”

The Justice Department is also requiring Panasonic to engage an independent compliance monitor to oversee the company’s new procedures for two years.

DiPalma noted that Panasonic Avionics and Global Eagle would likely have “substantial synergies” since both count Southwest Airlines as customers and maintain large inflight entertainment divisions that don’t rely on connectivity.

Panasonic Avionics’ acquisition of ITC Global in 2015 also made the company a provider of satellite connectivity to maritime and remote land customers. Global Eagle made a similar move in 2016 when it acquired Emerging Markets Communications.

Wells Fargo Analyst Andrew Spinola wrote May 4 that Gogo appears to be a less attractive acquisition target.

“While we agree that consolidation would be good for the Aero Connectivity space, we don’t believe an acquisition of Gogo is likely,” he wrote.

Spinola declined SpaceNews request for further explanation, but Gogo on May 4 withdrew it’s 2018 guidance for several financial metrics including capital expenditures free cash flow guidance, and said it was assessing new ways to improve its cost structure.

Satellite operators Viasat’s and Inmarsat’s use of a higher frequency, Ka-band, for IFC services would likely lessen the benefit of consolidating with Panasonic Avionics, DiPalma wrote.